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A new asset class emerging for NSW investors

Investors in NSW have long been focused on residential property thanks to year on year capital gains, however, that trend is changing as you read. Over the last five years a new investment asset class has emerged in response to shifting market conditions that have made residential less favourable.

This emerging class includes previously unattractive commercial investments properties: including service stations, commercial banks, liquor stores and perhaps even that Hungry Jacks down the road from yours. Such properties are attractive thanks to long-term tenants, fixed annual rental increases and the perceived security that they offer (compared to residential at least).

Let’s have a closer look at this emerging asset class, the benefits it may offer investors and the causes for this shift in the market.

What’s makes this class of property different for you?

These properties will usually have a long-term lease – an agreement that guarantees the owner a fixed income stream.

Investment in this class of commercial real estate is motivated by the promise of a steady and reliable income stream, rather than the possibility of large capital gains. A different style of investment that is perhaps more sustainable in the long run.

Thanks to their generally reliable and well-known tenants (commercial banks, petroleum companies) these properties will usually have a long-term lease – an agreement that guarantees the owner a fixed income stream over a period of time.

Additionally they often have fixed rental increases that promise higher income in future as the asset matures. Well-known corporate tenants are also ideal, as they generally maintain rented properties to an impeccable standard, minimising the outgoing maintenance costs usually associated with such commercial properties.

Despite all the clear benefits of such an investment, one of the most crucial is diversification. In the face of uncertainty in the NSW residential market, having a varied and diverse portfolio is more important for investors than ever before, as it helps ensure a steady income if one stream (say the residential market) becomes unstable or starts to lose its value.

These factors make such investments increasingly attractive in an uncertain market.

Who’s investing in these properties and why?

A wide variety of private investors are taking a stake in this asset class including private super funds and wealthy investors. Most interesting, its the fact that mum and dad investors are forming syndicates to increase their buying power and share risks, in order to invest in such commercial properties.

This reveals that this commercial investment class can be accessible to a wide range individuals with varying net worths.

This commercial investment class can be accessible to a wide range individuals.

The main driver behind the rapid rise in investment in these kinds of properties, may be the year on year value increases in Sydney’s residential property market.

CoreLogic RP data shows that the median price of all dwellings in the city has risen past the $1 million mark – a figure that will send many investors running for the hills.

Not only are prices sky-high, but the future of the residential market is uncertain. A QBE report suggests that capital gains in Sydney may grind to a halt in the near future, causing residential investments to drop in value by as much as 2.7 per cent in 2017 and a further 2.3 per cent in 2018.

The commercial properties discussed offer an investment less reliant on a volatile market and more stable when it comes to long term returns. This earmarks them as an excellent alternative to residential investment, and perhaps one of the best options for diversification.

What’s going on with sales?

During this year total sales volume in this investment class exceeded $426 million.

Rapid growth in this investment class began in early 2011 and accelerated through to 2015 when the largest sales volume in several years was recorded.

By our measures, 2016 looks to be following this trend and may surpass even 2015 in terms of total sales volume.

This reveals that demand is growing for these properties amongst investors and basic economic principals dictate that as demand grows so too will prices. This may increase the value gains experienced by such properties in the near future, making them an even more attractive investment option.

Surprisingly investment spending on these types of properties is split fairly evenly between metropolitan Sydney and regional areas – something which is fairly uncommon for commercial property investments. Typically the split between metropolitan and regional areas sits at around 70 per cent to 30 per cent, respectively. However, in this asset class data shows that just over 60 per cent of sales were recorded in Metropolitan Sydney, with the remaining 40 per cent recorded in regional areas.

These figures show that investors outside of the city are becoming increasingly active, and that purchasing rural real estate is an option that should be considered when diversifying your portfolio.